Day Trading Strategies – Trend and Counter-Trend Trading – Which One Should You Follow ?

I pen down this article while keeping in mind the average confused day trader – who is still searching for that holy grail which will enable him to fulfill his desires. These are lessons which I had learnt myself while day trading the Indian indices / currency markets. Certain “successful” traders may / may not like what I intent to list over here. But hey, this is a trading blog maintained by me and hence, I get to post anything related to day trading, right? 😛

Okay trader. So you have been searching high and low for that most effective day trading technique. Let me get this straight – stop sifting through the “junk” that is already present in the internet. You will come across various self-proclaimed day trading gurus. If someone says day trading is simple, I ask him / her another question – could you show me your yacht, please? Surely, if the candidate in question finds day trading to be simple, then he / she must be making quite lots of money doing what they are best at. Hence, purchasing a private plane or yacht should not be a problem for them. Therein lies the problem – as soon as they hear the query (show me your yacht), they scoot. It is easy to blabber things. However, getting things done and making home with profits is an entirely different niche. It requires experience and skill – something which you may / may not have.

Let me start off this discussion with counter-trend trading. If you watch the intraday chart of any liquid stock / index, you will find a common similarity. Every day, the stock / index will move certain points up or down i.e. it will create a high price and a low price. Once the high price or the low price is created, the contract can start moving away from the high / low point. For instance, today, the nifty futures June contract made a high of 5424.90 and a low price of 5361.10. The reader may notice that these points were touched just once; upon touching them, the contract began to move further away from these prices. What if we could know these reversal points in advance? Surely, we could have made quite heaps of money, right? We could have shorted easily in between 5420 and 5430 only to cover it in between 5360 and 5370. Again, we could have reversed the trade at these levels and await for the value of the contract to surge (which did occur). This is what the counter-trend traders do.

The trend traders – what are they up to? The trend followers do not look forward to price reversals. They merely trade with the trend. In other words, they sell when the market falls. They buy when the market surges to greater heights. When they achieve their profit targets, they close the trade and exit the session. Since the value of the contract dwindled today, these people would have shorted the contract and squared off the trade when the contract hit their target price.

Now that you are aware of the basics, let us continue more with this discussion.

Now comes the dilemma. Among these two methods, which one should you follow? Seasoned traders, with ample years of experience to back them up, will utilize trend / counter-trend trading for obtaining profits from the stock market. A beginner or an intermediate trader must concentrate on one of the above mentioned methods. Which one among these are the most effective?

Trading against the trend or counter-trend trading will enable you to make greater profits. You will be able to capture the entire range of the movement of the contract. However, there lies a small problem – how can an average retail trader determine the top or bottom levels of the market? If we take the above-mentioned day, the contract went on making lower lows during the entire session before reverting back to 5390 levels. So you will have to buy at multiple times while ‘assuming’ that the market has already bottomed out only to see the value of the contract dwindling repeatedly. Take the exact opposite scenario – there have been days when the contract went on breaking resistance points (i.e. making higher high prices) throughout the day. Imagine your dismay when your sell trigger gets stop lossed out and the contract surges to even greater heights.

So, my advice to fellow traders is – please stick with the trend. Follow what the rest are doing. When they are buying, you too should buy. When they sell, you too should sell. Bark with the big dogs. Never try to stand in front of a moving train. It is plain common sense if you ask me, because unless you have access to ample cash resources, you can never change the existing trend. Banks and other large financial institutions are able to do it because they have been doing this for many years – probably even before some of you were born. So, they have access to large cash reserves, which they duly utilize in every trading session to create the trend. Please formulate your day trading strategy to determine the trend and follow that predominant trend. Also, bear in mind that the trend may change anytime. Your trading method should have an effective mechanism to detect this change; so that you too can reverse the direction.

Here is an alternate explanation to why you must always follow the trend. There are three participants in every market. They are the bulls, the bears and the foxes. There are also the pigs, who get slaughtered in the midst of the commotion. The bulls will try to buy the contract in large quantities so as to increase its value. The bears will do the exact opposite; they will try to take the contract to even lower lows. There is this constant struggle in between the bears and the bulls in every market. In due course of time, the bears / bulls will hand over the charge to the bulls / bears. This is where a trend change occurs. How can an average retail trader such as yourself know when this ‘change of power’ is going to occur? These are decisions made behind closed doors and air-conditioned offices by the FIIs and the DIIs. Unless you, the average trader, have access to insider information, you will never know about this change in the trend. We must always be vigilant of the price action, keen like a fox and then we will understand this ‘change of power’ and hence, we can take additional precautions.

I decided to create this post because I see many retail traders always try to catch the tops / bottoms of the market. This is especially relevant in forums such as Mudraa,Traderji and ForexFactory which are dominated by members who think they can outsmart the market. And of course, every single day, I see them losing their temper because the market surged past their ‘initial tops’ or ‘initial bottoms’. The problem lies primarily in the fact that catching the tops and bottoms can give you immense profits. Most of you may have heard about the legend W.D.Gann; he always used to catch the tops / bottoms of the market and could successfully do so for many years. But unless you are the second incarnation of W.D.Gann, I would never bet on you.

My intention is to show the average retail trader the correct direction. The rest entirely lies upon your hands and brains. Day trading is not an easy manner to make money. The market is literally rigged to take your hard earned money from your hands. Staying ahead of the rest of the pack requires precise determination and ample efforts.